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Apple's iPhone Profits Will Weed Out Other Players

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This article is more than 8 years old.

Companies are in the business to make money. While they may stay with a product that is losing money for a while if there is a strategic purpose, at some point in time they typically throw in the towel and stop making ones that lose money. The smartphone industry is an interesting case since some companies such as Blackberry try and reposition themselves, others like Motorola get bought and sold multiple times (Google, correction: initial version had Microsoft, and then Lenovo ) and others like Amazon introduce a smartphone (Fire) and then seem to withdraw from the market. (Note that I own Apple shares).

Apple captured over 90% of smartphone profits

Michael Walkley from Canaccord Genuity estimates that while Apple’s iPhone only accounted for approximately 17% of smartphone unit sales for the year since they are premium smartphones they generated an estimated 54% of the industry’s revenues. He estimates that Apple’s iPhone captured 91% of the smartphone industry profits in 2015 (vs. 80% in 2014) and that Samsung was the only other profitable smartphone company with 14%. Even though Samsung sells more smartphones than Apple Samsung’s average selling price (ASP) is an estimated $180 vs. Apple’s $691 in the December quarter which allows Apple to blow away the competition.

Since these two companies account for an estimated 103% of the industry profits Walkley estimates that Blackberry, LG and TCL (Alcatel) broke even, Lenovo/Motorola, Sony and HTC lost the equivalent of 1% of the industry profits and that Microsoft lost 3%. There are other players in the smartphone market who do not release financial results such as Xiaomi however I’d be surprised if their profit margin, if they have profits, are at best in the low single digits.

Walkley estimates that Apple has captured over 90% of the industry profits for five consecutive quarters. It may be that the companies that are barely hanging on are doing so to maintain a presence in the market and various geographies for future products or for other reasons. Depending on if and when Apple launches an updated 4” screen sized smartphone to replace the iPhone 5s this new smartphone would further weaken the players who are trying to hang in there.

Being the industry profit leader bodes well for the future

Apple’s ability to net almost all the industry profits combined with its high loyalty rate position the company to maintain a high level of sales. Apple will be able to fund its research and development efforts and support its App ecosystem to maintain its leading position. The virtuous cycle of making the most money allows Apple to sell more iPhones which increases its install base, which generates more revenue and profits and the cycle continues.

Source: GlobalWebIndex

While there is always the threat that another company could come out with a better product (the required first step to impacting the iPhone) it will also need to entice developers to build Apps for its devices but that becomes harder as Apple and other leading smartphone companies have large install bases for the developers to sell their Apps into. A number of competitors have tried but so far none of them have been able to make a dent in Apple’s leading position.